Ratings service cuts Aon after Hewitt deal

By Associated Press
Posted July 13, 2010 at 9:40 a.m.

An RBC Capital Markets analyst lowered his rating Tuesday on insurance conglomerate Aon Corp., saying earnings growth from its planned acquisition of human resources specialist Hewitt Associates for $4.9 billion is far off.

Analyst Mark Dwelle cut Aon to “sector perform” from “outperform,” trimmed earnings per share estimates 2010 and 2011 and reduced the price target on shares by 13 percent, to $40.
That still implies gains of more than 12 percent from Monday’s closing price. Aon shares fell $2.72, or 7.1 percent, to $35.62,  Monday after the company said it would buy Hewitt in a cash-and-stock deal that will nearly triple the size of its consulting business.

Aon will pay $50 per Hewitt share, a 41 percent premium over Hewitt’s closing price Friday of $35.40.

Aon said it expects the deal to save $355 million annually beginning in 2013, primarily from reducing back-office operations, management overlap and public company costs and getting more from technology platforms. It said the deal will help earnings in 2011 and 2012.

But Dwelle said he expects earnings per share of $3.48 in 2011, down from a previous estimate of $3.62, because of stock dilution and the likely elimination of Aon’s stock buyback program.

Analysts polled by Thomson Reuters expect earnings per share of $3.58 in 2011.

Still, Dwelle said Aon management has historically done a good job with integrating acquisitions and cutting costs, and the deal could “serve investors well” by late 2011 or 2012.

He noted that purchasing Hewitt will make Aon a more “cyclical” business, or one whose revenue tends to track closely with upswings and downswings in the economy. If the economy weakened again, leading companies to curb spending on consulting, that could delay Aon’s goal of a 20 percent operating margin for the consulting unit, said Dwelle.

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